Welcome to RBC’s Markets in Motion podcast recorded November 30th, 2021. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. This week in the podcast, we take a dep dive into how investors are thinking about the omicron variant.
On Monday afternoon, when markets were bouncing after last Friday’s big sell-off, we conducted a short investor survey on the variant. Investors were eager to share their views. We got 95 responses in less than 6 hours with minimal effort.
Four big things you need to know:
First, the worried camp is a clear minority. Second, nearly half said the path of tapering won’t be altered by the variant. Third, investors are being patient in terms of their portfolio repositioning due to the variant. Fourth, severity of disease and the efficacy of vaccines are the two issues on the variant most in focus.
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Now let’s dig in.
Takeaway #1: in terms of the overall views, the worried camp was the clear minority.
- Our first question asked how optimistic/worried investors are about omicron from a stock market/economic perspective.
- Not surprisingly, “neutral/don’t know” was the most popular response at 36%.
- Otherwise, the optimists far outweighed the pessimists. 45% put themselves in the constructive camp, describing themselves as very optimistic (11%) or optimistic (35%).
- Just 19% said they are worried (no one was very worried).
Takeaway #2: While there was a near consensus view on tapering, views on hikes were split.
- Roughly half (49%) said the path of tapering will not be affected by the omicron variant.
- Meanwhile on hikes, 22% said the path will not be affected by omicron while another 22% also said the Fed will delay the start of hikes.
- It’s worth noting that very few thought the Fed would pull forward tapering or hikes, helping to illustrate why markets reacted so poorly on Wednesday afternoon to Powell’s indication that a faster taper is on the table at the next Fed meeting during his Q&A session before Congress.
Takeaway #3: Investors are being patient with their portfolios.
- On our question about how portfolio positioning has been impacted by the omicron variant, “I am not doing anything until I get more information” was the most popular choice, gathering 49% of the votes.
- Dip buyers were split between those who were buying nervously (19% said they are buying higher quality, while 17% said they are buying or secular growth) and those who were buying confidently (22% said they are buying cyclicals).
Takeaway #4: Severity of disease and vaccine efficacy topped the list of the biggest omicron related questions on investors’ minds.
- As Wednesday’s negative reaction to Moderna’s suggestion that new vaccines will be needed to battle Omicron demonstrated, news flow the vaccines and severity will be key to monitor in coming weeks.
- Other issues in focus for our survey respondents include hospitalization and death rates and transmissibility, while some also highlighted the policy response and the efficacy of treatments.
- Interestingly, several respondents argued that if omicron turns out to be more transmissible but low impact, that this would be bullish for equities since we would be at the COVID-19 end game and society would be able to move on. One respondent asked: “Why travel bans and political theatre if we learn this could ultimately crush COVID as we know it?” This is a theory that’s been circulation since the weekend.
Wrapping up with some thoughts on what this all means for markets.
- The results suggest to us that US equity investors are willing to be patient as more information on omicron comes to light in the coming weeks.
- The results also suggested to us that there are a decent number of bulls lurking in the shadows. At this time, we see no reason to change our market call and our 2022 S&P 500 target remains 5,050.
- Stocks aren’t out of the woods yet when it comes to omicron, and the news flow, which is impossible to predict, definitely matters in the short term. While we don’t know exactly how much lower omicron will take this market, we do know how this story will end – with buying the dip.
- We also suspect that the nervous tape we saw on Monday in which Secular, Growth, and Large Cap outperformed will be more representative of the kind of moves we’ll see while investors wait for more clarity than the panic and fear that drove Friday’s price action. Our view that Cyclicals, Value and Small Cap will outperform in the intermediate term has been put on hold, given that all of these trades have been synced up with trends in COVID cases for the past year.
That’s all for now, thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for thoughts on specific sectors from other RBC analysts.